Virtual vs. Traditional Currency

The financial system as we know has been changed. Since at least in 2017, when the Bitcoin rate almost reached $ 20,000, everybody realizes about the importance of virtual currencies. But not everybody knows about the power and possibilities of virtual currencies. The Bitcoin is one of the most recognized virtual payment methods, but there are a certain more on the market with a different purpose. The market for cryptocurrencies is giant relating to over 1600 kinds of different currencies all over the world, for example, Litecoin, Iota, and Gridcoin. Some experts expect this to be the future of the financial system and compensation of traditional currency like cash, credit cards, and debit cards.

How do virtual currencies work?

Everybody already heard about virtual payment methods, but a very few really know how these works. Virtual payment methods that only exist digital, are called cryptocurrencies. They are based on the idea of non-governmental alternative currencies for exchange. Unlike the traditional currencies, where the cash generation is proceeded by the central bank or commercial credit institutions, virtual currencies are created by mathematical processes, called “mining”. Mining works by participating on a network. Everybody with enough computer power can join it. There is a fixed rate of newly minted coins given out every day. So the financial access is given to people all over the world and everybody can participate. This is based on peer-to-peer computing, which is able due to a decentralized computer network. So cryptocurrencies are not regulated, controlled and administrated by a central instance. The main functions of cryptocurrencies are storing, sending and receiving money.

What are the limits of traditional currencies?

More and more people don’t trust the traditional bank system and especially the political influence. Especially the political influence in a free market economy can cause instability, inflation or period of low-interest rates. For these reasons, people are searching for a solution. Cryptocurrencies are a good alternative to solve peoples mistrusts towards traditional bank systems and political actions. Cryptocurrencies offer transparency and their protocol is based on the open-source model. The consumers have control over their own money.

The money is not subject to any regulations by banks or other third parties. Another important point is the access to the financial system. In some countries such as developing countries, there ain’t no cash machine on every street. The access is restricted. Developing countries have to fight against inflation and unstable currencies. Cryptocurrencies give a stable alternative to unstable currencies in bad economically countries. Whenever it comes to a payment with credit cards the risk for fraud is terrifying high.

At least, due to third parties, there are high operating costs for every transaction and this takes a long time. Our financial system is not contemporary and needs a change.

What are the benefits of virtual currencies?

One of the most considerable advantages of cryptocurrencies is the low transaction cost. Other electronic Payment systems for traditional currencies generally have high fees for sending and receiving money. The most cryptocurrencies have no or low transaction costs and they work more cost-efficient. Accordingly, the payment process is quicker, caused by their independence from third parties, such as financial institutions. Transactions can be realized within milliseconds. In addition to that everybody can make money by participating in mining and the access is given to people, who don’t have access to the traditional financial system.

Financial institutions have to fight against forgery especially with credit cards. While using credit cards as payment, you give them access to your credit line this could be misused for identity theft. Virtual currencies are forgery-proof by a decentralized ledger of the blockchain technology, where all transaction ever made is recorded. For a transaction, you only give the necessary information to the sender/recipient. That makes the whole transaction saver and anonymous.

Another point for cryptocurrencies is the easy usage and the fact that they are stored in electronic wallets. So it’s not necessary to keep credit or debit cards with. All you need is an app on your smartphone.

Opportunities and future prospects of cryptocurrencies

The growth potential is giant, there are more and more different cryptocurrencies and they become more popular. Our world is getting more and more digitalized. The traditional money like we know is going to restrict the digitalization. Traditional currencies take too long, they are too expensive and they aren’t available anytime and anywhere. Consequently, there has to be an innovation for our financial system to handle the globalization and digitalization. The blockchain technology could be the solution to this problem. It could reduce the paperwork and relieve the traditional bank system.

There is a chance of profiting from mining with cryptocurrencies. The number of the user's increases. The possibilities of the new technology are growing and it’s already integrated into our financial world. Established firms and new start-ups adopt these systems and want to get early adopters advantages. The chance is not just for private consumers, it’s a big chance for firms to expand and scale their business model. Trading goods and services for business and private people can be easier.

In summary cryptocurrencies and the attendant blockchain technology can force a lot of new innovation for our financial world. For example with micro- and nanopayment it’s possible to send and receive a very small sum of money. Payments could be easier and the financial market is accessible to everybody. Cryptocurrencies become more popular. Today the cryptocurrencies aren’t accepted all over the world yet, but this can change in a certain of time. Like in case of credit cards people need time to trust new innovation. Maybe cryptocurrencies can’t completely remove our traditional currencies in the next future, but they could be a good addition. Virtual currencies become more relevant in the future. The more firms integrate this system, the more popular it will get. And one-day cryptocurrencies could be integrated into our lives. Like our credit and debit cards today. It will be normal being paid with cryptocurrency and paying your coffee with your electronic wallet.

More Information

Further information about blockchain and cryptocurrency can be found in the PiGrid Shop under "Learn more".